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WHO DO YOU SUE TO GET PAID? Washington Supreme Court Clarifies Necessary Party Requirements for...

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February 2018

WHO DO YOU SUE TO GET PAID? Washington Supreme Court Clarifies Necessary Party Requirements for Foreclosing on a Construction Lien Release Bond

Last month, in Inland Empire Dry Wall Supply Co. v. Western Surety Co., Case No. 9411-1 (Jan 18, 2018), the Washington Supreme Court, clarified who is an indispensable party in a construction lien foreclosure action when a lien release bond is involved. Interpreting RCW Chapter 60.04, Washington’s mechanic’s lien statute, the Supreme Court held that the surety who issued the lien release bond is the only necessary party to the action; neither the property owner or the general contractor – even if they may be the bond’s principal who purchased the bond – are not indispensable parties in a foreclosure action against the surety of the lien release bond.

Washington is a jurisdiction well-known for requiring strict compliance with the statutory time requirements of the state’s construction lien statute. This high court ruling provides welcomed clarity for contractor lien claimants faced with foreclosing against a release bond pursuant to RCW 60.04.161.

Case Background: The Underlying Dispute and Trial Court Ruling

Inland Empire Dry Wall Supply Co. (“Inland Empire”), an unpaid dry wall supplier on a multi-unit residential construction project, recorded a lien against the project. The project’s general contractor, Fowler General Construction (“Fowler”) responded, in order to release the lien from the project property, by posting a lien release bond obtained from Western Surety Co. (“Western”) in accordance with RCW 60.04.161.

Inland Empires’ suit to foreclose on the lien release bond named Western as the only defendant; it did not name Fowler as a defendant even though it was the bond’s principal. In a motion for summary judgment, Western argued that Inland Empire’s failure to name Fowler as a defendant did not comply with RCW Chapter 60.04. The Spokane County Superior court agreed, ruling that the requirement under RCW 60.04.141 to serve the property owner in a lien foreclosure action should be interpreted to require both the bond principal and surety to be served as defendants. The court ruled that Western was discharged from liability as a result of Inland Empire’s failure to name and timely serve Fowler, and dismissed the action.

The Appellate Ruling

Last year, in a split decision, the Washington Court of Appeals reversed the lower court, concluding that RCW 60.04.161 controlled and that the bond surety was the only necessary party that Inland Empire was required to name as a defendant in its bond foreclosure action. See Inland Empire Dry Wall Supply Co. v. Western Surety Co., 197 Wn. App. 510, 389 P.3d 717 ((2017).

The appeals court’s analysis scrutinized the construction lien statute, and it ultimately held that “[t]he omission of any reference [in RCW 60.04.161] to the bond principal … indicates the legislature’s intent that bond principal need not be included.”

A dissenting opinion by Judge Fearing argued that joinder of the bond principal necessarily followed from the statutory language of RCW Chapter 60.04 and “the nature and the purpose of the lien release bond.” The dissent also reasoned that joinder of the bond principal would avoid duplicitous litigation. If nothing else, the thorough analysis of this dissent, increased the need for the supreme court to resolve the continuing confusion on how RCW 60.04.161 should be applied.

The Supreme Court’s Decision

Following the appellate court’s majority opinion, the Supreme Court interpreted the statute to mean that “[o]nce a lien release bond is recorded, the procedural statute shifts from RCW 60.04.141 to RCW 60.04.161,” and “the real property owner and the real property subject to the claim.” Because the lien claimant must turn to the lien release bond as the only available source for collecting the amount owed, the purchaser of the bond (the bond’s principal) “need not be treated as the same way as the property owner under RCW 60.04.141.”

The Court acknowledged that in any foreclosure action a lien claimant “must prove the validity and the right to recover the claimed amount” – whether against the property and the owner (in a lien action per RCW 60.04.141) or against the bond (in a bond claim per RCW 60.04.0161). However, “while mindful of the practical considerations,” the Court noted (in dicta) that the surety can assert the same claim or defenses as the bond principal and “nothing in the statute or the case law … suggests that the surety is precluded from challenging and litigating the validity or amount of the lien.” Further, nothing in the language of RCW 60.04.161 or prior Washington cases prevents the surety from impleading the principal or seeking its assistance or bringing a third party claim.

Practical Take-Away Lessons

For lien claimants:

While there may be strategic reasons to do so otherwise, this decision provides important clarity and guidance for meeting strict compliance with the procedural and timing requirements of Washington’s construction lien law.

Also, in the common situation where the lien claimant serves the property owner in a lien action before a lien release bond is posted, the lien claimant must be sure to amend the complaint to add the surety and foreclose on the lien secured by the bond.

For owners, contractors or subcontractors who post a lien release bond to unencumber the project property:

Be aware that even if a lien claimant’s bond foreclosure action identifies the surety as the only defendant, the surety may bring in the bond principal by impleader or by bringing a third party claim in the same action.